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Industries:  General 

Trade under siege: checklist to prepare for trade risk

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By: Sakthi Prasad
Content Manager

calender03 Apr 2018



The Beroe LiVE community of procurement professionals had voiced their topmost worry last year: Fifty five percent of those who were surveyed said that they are worried about global squabble over free trade. And their worry is coming true as trade is increasingly getting caught in the crossfire of geopolitics.

Please click here to download the full report: https://www.beroeinc.com/pdf/immigration-trade-automation-procurement-report.pdf 

TRADE

1. As a procurement professional, what worries you the most?


 

2. Work experience Vs.  As Procurement professionals, what worries you the most?

The above two graphs show that across the hierarchy of procurement organizations, global squabbling over free trade scores over other two hot topics.

3. As a result of Brexit vote and the recent spat over NAFTA

As per our survey, 37 percent of respondents said they consulted their legal teams immediately after Brexit vote and spat over NAFTA.

Renewal of existing contracts can face some turbulence since there may be some confusion as to what legal framework needs to be adopted if trade breaks down between countries.

For example, if NAFTA goes away then it can have an immediate impact on logistics and warehousing. Custom costs, paper work and waiting times across the borders are bound to go up.  Also, the choice of warehouse can become a challenge for those companies with interlinked supply chain across the three countries. This may result in an overall increase in logistics and warehousing costs.

Twenty four percent of respondents also temporarily put on hold certain sourcing decisions. This is understandable because import tax/tariff is a threat that can throw lot of calculations out of the window.

Nearly one-third of respondents said they were scouting for suppliers from alternate regions as Plan B. This is necessary especially if the raw material or service is critical to one's business.

Interestingly, 22 percent of respondents have said that they hardly noticed trade deal risk prior to Brexit and NAFTA.  Now that these disputes feature in mainstream media, it has become a new normal and sourcing managers should be prepared to face the risk of trade being disrupted.

A little more than half have opined that they discuss the risk of trade deals internally as well as with supplier as and when the need arises. However, only 16 percent have said risk of trade deals is part of annual category strategy.

How should a company prepare for trade deal risk?

  • Identify where the risks are
  • How fast does a disruption interrupt production?
    – Immediate Impact?
    – One Month
    – Six months
    – One Year or more
  • What are the substitutes for the product? What is the availability and market environment for the substitute?
  • What are the additional costs/risks involved in opting for a substitute?
  • Is there an inventory management system in place?
  • How long does inventory keep the production running?
  • Does the supplier have multiple production sites?
  • Is there a communication plan established with the supplier in case of a disruption?
  • What is the lag time in the notification of disruptions from the supplier?
  • Are there any alternative suppliers?
  • Is there a list of pre-qualified suppliers?
  • Is the risk profile of the main supplier different from that of the alternative suppliers?
  • Are the alternative suppliers and the main supplier from different region?

Once the required information has been collated and the risks have been identified, the following mitigation plans can be adopted.

Major Risks

Strategy

Description

Supply Disruption, Price

Risk Source, Risk Assess, Risk Mitigate

Identify the risk source, assess the impact based on scenario planning (“what if” type of questions) and mitigate or transfer the risk accordingly.

Supply Disruption, Opportunistic Behavior of Supplier

Off Shore & Near Shore

Main supplier is a single source supplier either offshore or near shore. The alternative supplier is a pre-qualified near shore supplier with buffer capacities.

Inventory and Scheduling, Quality

Information Management Systems

Maintain a central hub of information relating to a particular supplier such as supplier contracts with different manufacturing locations of the company, supplier performance indices by each manufacturing location

Lack of Innovation, Quality, Opportunistic Behavior of Supplier

De-risking sourcing

Governance:
A governance structure ensures effective management of outsourcing.

Retention of Control: Maintaining the right level of control over outsourcing facilitates better risk management.

Technology, Quality

Vendor Managed Inventory

A risk transfer strategy which results in more efficient supply chain as the supplier manages the entire chain, and is responsible for disruptions at any tier level

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